Authors

Files

Description

Because of a growing number of dividend-focused portfolios today, the critical issue is whether or not these types of portfolios create alpha. Therefore, the purpose of this study is to determine if a portfolio of stocks focused on dividends can create alpha (i.e. excess returns) in both declining and rising stock markets. Holding constant such key factors as valuation, earnings growth, and profitability, at the margin, I have assumed the critical dividend factors in determining alpha are dividend yield, dividend growth, and dividend payout ratio. To test the hypothesis that one or a combination of the above dividend factors can contribute to a portfolio's alpha, I will develop a "baseline" portfolio that has these general parameters: [1] the stocks in the portfolio will have Price to Earnings Ratios below the market, [2] their expected growth rate in earnings is greater than the market, and [3] the return on common equity will be higher than the market. The stocks in the baseline portfolio will then be weighted respectively by their dividend yield, dividend growth rate, and dividend payout ratio for the periods 2005-2010, allowing for yearly rebalancing. The portfolio returns will be compared to the S&P 500 market returns over the same time periods to determine if alpha was created. I will also calculate information ratios for the various dividend portfolios to determine risk-adjusted excess returns.